Using the CAPM to Calculate the Cost of Capital for a Risky

question 35

Multiple Choice

Using the CAPM to calculate the cost of capital for a risky project assumes that:

• A)using the firm's beta is the same measure of risk as the project.
• B)the firm is all-equity financed.
• C)the financial risk is equal to business risk.
• D)Both A and B.
• E)Both A and C.

---

Definitions:

Autoregressive(2)

A type of statistical model used in time series analysis in which a variable's current value is predicted from its own previous values, using two time-lags.

Second-order Autoregressive Model

A stochastic process where the current value is based on a linear combination of the two immediately prior values plus an error term.

Average Mortgage Rate

The mean interest rate given across all mortgage loans in a given period, indicating the cost of borrowing for home loans.

Seasonal Variation

Fluctuations in data or activity that occur at regular intervals over a year due to seasonal factors.